Analysis of the Advantages and the Risks from the Point of View of the Classical Theory Classical Theory

Foreign investments, from the point of view of the classical school, is a game in which a positive result is gained by one player only and that is the Multinational Company; these companies take more than they give. In this context, it is useful to present the points of view of a number of the pioneers of the classical school, so as to understand their views and arguments which are opposed to the point of view of the pioneers of the modern theory.

Baliga (1994) referred to analytical positions of the practices of US Multinational Companies in developed countries.

The colonisation point of view assumes that the host countries are considered a main source for the raw and primary materials and hence the foreign investments there target the extraction of these materials to be used by the mother country or other advanced countries.

The point of view of the foreign investor assumes that the host country, with their many chances of investments, production and marketing of the commodities, represents a profitable market and, to utilise these chances, national investors must participate in the investment projects, on condition that the foreign company retains the right over management and control, and retains the decision on when to execute the investment project. This requires the share of the foreign investor to be more than that of its national counterpart’s share in the project. As for the services of the markets outside the host countries, it is preferred by investing companies that they should provide these via the knowledge of the mother company and not through its branch in the host country (Baliga, 1994).

The third point of view is related to the choice of the host country as a site for the investment, and how to operate, manage and organise the investments there. This point of view considers that the Multinational Company has to enjoy a competitive position and hence it is required to choose a host country that is characterised by low cost of labour. It is therefore preferred, whenever possible, to transfer or establish the investment projects that depend on labour element in the first place into these countries and that the routine and mechanical jobs are filled by the national labour force in these countries. At the same time, it is necessary to keep a small size investment in these countries so as to minimise the risks.

Frank (1981) considers that the element of exploitation of the wealth of the host countries by the foreign investors is present with all its facets in the existing relationships between the two parties of the foreign investment, and the fact that foreign investments in developing countries concentrate on the extraction industries is a good example of that. In addition, foreign investments in such industries are not

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other activities in the host country and, at the same time, can lead to certain trends of economic development that can lead to an increasing dependency of the host countries on the advanced countries as the source of the investment. The prices of the primary materials in most cases are very low compared to the prices of the imported commodities and hence the rich countries get the benefit of the rise of the rate of return on their investments and of getting the raw and primary materials required for the industry for the lowest prices (Frank, 1981).

It might beneficial before presenting the modern points of view, to present the classical point of view, summarised as follows:

1. A great concentration of Multinational Companies in the extraction industries rather than on the transformational or other productive activities might reflect the intent of exploitation on the part of these companies.

2. It might be wrong to assume that Multinational Companies shall be of ideal conduct and practice in their business in developing countries.

The continuous desire of these Multinational Companies to control the organisation and management of their projects in the host countries might make them always prefer that type of direct investment (Hood & Young, 1997). No doubt this might work against realising the developing countries' goal of increasing development and maintaining the ownership of the productive projects as a national property. It might also have a negative effect on their economic independence, if the foreign investors own the investment projects with the probability of interference from the mother countries in the affairs of the host countries.

The fear of confiscation or nationalisation of Multinational Companies by some developing countries may mean that the foreign companies prefer to invest through establishing joint ventures. In spite of its suitability for the company, this will not help to achieve developmental goals for the host country.

Some consider that the intents of Multinational Companies with regard to helping the host country develop may be recognised through the analysis and study of the direction and flow of the foreign investment and its volume among the countries of the world.

Examples of previous incidents and practices of Multinational Companies are few and lack enough evidence as to the causes that led to their occurrence to assure the truth of some of these incidents, but that only helps to spread the feeling of fear in developing countries about opening the door to foreign investments, or perhaps causes them to put many obstacles in the way that affects the extent and volume of FDI flow through Multinational Companies so as to maintain their political and economic independence.

4.2.2 Analysis of the Advantages and the Risks from the Point of View of the